Nonprofit or For-Profit Health Corporation

Mutual Insurance Company: A mutual insurance company is organized to benefit its policyholders or members. Unlike mutual benefit corporations, mutual insurance companies are not automatically organized as nonprofits. In most states, private individuals can personally benefit from a mutual insurance company’s activities; therefore mutual insurance companies are not treated as nonprofit corporations. In fact, many are organized under statutes that parallel for-profit stock corporations. Upon dissolution, the mutual insurance company can distribute its assets to its policyholders. There are, however, significant differences between mutuals and for-profit companies. Although members of a mutual insurance corporation (generally the policyholders) are permitted to have an economic interest or own the corporation, they cannot sell their interest. Unlike stockholders in a for-profit corporation, a mutual policyholder retains an interest in the corporation only as long as his/her policy is in effect.

Some insurers that originally were nonprofit health, hospital or medical service corporations and later became mutual insurance companies continue to be nonprofit, even when they become mutual insurance companies. For example, the state of North Dakota created a special nonprofit mutual insurance company law to govern its Blue Cross and Blue Shield plan. The law allowed the Blue Cross and Blue Shield plan to become a nonprofit mutual insurance company. It is still categorized and treated under state law as nonprofit and is defined by law as a charitable and benevolent organization. It cannot distribute its assets to its policyholders, nor can it undertake for-profit activity.

A number of other Blue Cross and Blue Shield nonprofits are now organized as or converting to mutual insurance companies, although many began as health, hospital, or medical service corporations. If a nonprofit corporation becomes a mutual insurance company, or if a mutual acquires a nonprofit corporation, the corporation must retain the responsibility to distribute the charitable assets to another nonprofit with a similar mission. Thus, when a nonprofit becomes a mutual insurance company, the charitable obligation owed to the public is transferred to the corporation in its new form. The mutual company takes the assets of its predecessor subject to the charitable trust obligation. After it becomes a mutual company, any assets built on behalf of its members belong to the members. However, assets built while it was a nonprofit health service and/or public benefit corporation must be preserved for charitable purposes on behalf of the public. Advocates should urge that a snapshot valuation be done at the time the nonprofit becomes a mutual and set aside, because this change in corporate form may make it more difficult to determine a corporation’s charitable assets at a later date.